Chapter 3-Gross Income: Inclusions

Question 1

Computation of an individual’s income tax liability begins with the determination of _______?

Answer 1

Income

Question 2

The _______________ to the Constitution gave Congress the power to tax “income from whatever source derived.”

Answer 2

16th amendment

Question 3

To ensure the constitutionality of the income tax, this phrase is incorporated in Sec. 61(a), where gross income is defined as follows: “Except as otherwise provided . . . gross income means all income from ____________.”

Answer 3

whatever source derived

Question 4

Accountants usually measure income when it is _______ in a transaction

Answer 4

Realized

Question 5

________ define income as the amount an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. To the economist, therefore, income includes both the wealth that flows to the individual and changes in the value of the individual’s store of wealth. Or, more simply, income equals consumption plus the change in wealth.

Answer 5

Economists

Question 6

Under the economist’s definition, unrealized gains, as well as gifts and inheritances, are ______.

Answer 6

Income

Question 7

Accountants believe that the ________ concept of income is too subjective to be used as a basis for financial reporting and, therefore, have traditionally used historical costs in measuring income instead of using unconfirmed estimates of changes in market value.

Answer 7

economic

Question 8

In accounting, the meaning of the term realization is critical to the income measurement process. Realization generally results upon the occurrence of two events:

Answer 8

(1) a change in the form or substance of a taxpayer’s property (or phrased another way, a severance of the economic interest in the property) and (2) a transaction with a second party. Realization occurs when a taxpayer sells property.

Conversely, the mere increase in value of property owned by a taxpayer will not result in the realization of income because there has been no change in the form of the property and no transaction with a second party.